Reasons some businesses fail

March 11, 2014

A harsh reality in the business world is that many business startups fail. Some failures had key factors that were overlooked or ignored in the planning stage.

One of those factors is identified as the lack of a good business idea. Simply stated, a good business idea solves a real need that customers have. Living one’s day-to-day life will identify plenty of opportunities. Every time an aspiring entrepreneur is frustrated about an inconvenience, chances are that millions of others are frustrated by the same thing. This could be the basis of a new product or service.

Another common contributor to startup business failures is that they did not properly research their market and define their customer base. “Anyone and everyone” is too broad a description and single males 60 to 64 is a small niche market with limited appeal. The issue here is defining the market served by the startup business, how to find data on that market, who the competitors are, and a determination of what it will take to win in this market. Revenue forecasts depend on the size of that market and credible assumptions of what share the startup can expect to capture.

The next “warning flag” for some failed startups would have been their lack of a comprehensive strategic plan. It’s easy to focus on the product or the service, but getting to the market requires passion and persistence. The strategy must have a powerful mindset that regardless of what hurdles crop up, they will be overcome. The strategic plan is the recipe for success. There are many ingredients needed in this recipe and here are just a few: A network of many people in a variety of roles, flexibility to move with the market, product and pricing schemes, promotional strategies, and contingency plans for positive and negative scenarios.

Lastly, a factor that contributed to the failure of many startups was undercapitalization. In other words, they did not have enough money to carry the business until it became profitable. Even though they may have been able to provide the requisite 20 percent to 30 percent down payment for a loan, the amount of working capital that will be needed may not be easy to determine. Business textbooks say a startup should have sufficient capital to fund the business for the first 12 to 18 months. While it may seem extreme, the startups that didn’t survive would probably be the first to agree.

Gordon Smith is a business specialist at the Small Business Development Center at Clovis Community College.